Good day, ladies and gentlemen. Thank you for standing by. Welcome to Emerson's Third Quarter Investor Conference Call. During today's presentation by Emerson management, all parties will be in a listen-only mode. Following the presentation, the conference will be open for questions. This conference is being recorded today, August 7, 2018. Emerson's commentary in responses to your questions may contain forward-looking statements, including the company's outlook for the remainder of the year. Information on factors that could cause actual results to vary materially from those discussed today is available at Emerson's most recent Annual Report on Form 10-K as filed with the SEC. I would now like to turn the conference over to our host, Tim Reeves, Director of Investor Relations at Emerson. Please go ahead, sir.

Thank you very much, Rocco. I'm joined today by David Farr, Chairman and Chief Executive Officer; Frank Dellaquila, Senior Executive Vice President and Chief Financial Officer; Mike Train, Executive President, Emerson Automation Solutions; Bob Sharp, Executive President, Emerson Commercial & Residential Solutions. Welcome to Emerson's Third Quarter 2018 Earnings Conference Call. Please follow along in the slide presentation, which is available on our website. Let's start with the third quarter summary on slide 3. Sales in the quarter of $4.5 billion increased 10% with underlying sales up 8%. Demand conditions remained favorable and trailing three-month underlying orders continue to trend in the 5% to 10% range with June orders up 9%. Profitability improved across all metrics with gross margin up 220 basis points and EBIT margin up 180 basis points. Price/cost was slightly positive in the quarter. GAAP EPS was $1.12, including a $0.24 tax benefit related to the Tax Cuts and Jobs Act. Excluding this benefit, EPS was $0.88, up 40% compared with the prior year. Q3 cash flow was very strong. Free cash flow of $804 million is 18% of sales and free cash flow conversion was over 110% in the quarter. We've continued to buy back shares. In Q3, we repurchased 3.7 million shares. Year-to-date, we've repurchased over 15 million shares for a total of $1 billion and we've returned over $1.9 billion to shareholders through both dividends and share repurchases. Turning to slide 4, third quarter gross margin was up 220 basis points. This improvement includes a tailwind from prior year Valves & Controls purchase accounting charges. This tailwind was partially offset by timing of the V&C acquisition, which closed in late April last year, resulting in two months of dilution from the acquisition last year versus three months this year. On a comparable basis, that…

Thanks, Tim. Pleasure to join the call again. Steven had asked me to provide a little bit of an update on our large project funnel, we shared that with you at the February investor meeting and we've updated it for today's discussion. On slide 8, you'll see for August 2018 we're at about $6.8 billion in funnel size. That has increased significantly since the February timeframe. We've seen projects going into the funnel really across all the different industry types that are listed there. I would say at this stage of the game, we're probably not anticipating the funnel to grow anymore given that there're smaller projects that don't make the funnel and there's investment decision dates beyond 2020. Right now, I think this is a very good set of projects that we're working with. There have been awards against this funnel probably on the order of $700 million to $800 million that we've been tracking over these last six months. Emerson has won a good number of those. I'm very satisfied with our hit rate on those awards. And generally, those have to be engineered by EPCs before they become orders and then ultimately become sales rec. So there's still a little bit of that out in front of us for the large part. We are seeing great take-up at our main valve partner concept. We've launched that here in the last year. Talking to customers as we've built up larger Final Control business. We are already seeing some very serious discussions around that and I think there's going to be end users and engineering contractors that want to take advantage of that. All in all, I think again the project pace is strong. I think the activities are there. I've been around the world twice in the last…

Thanks, Mike. So we'll continue now on slide 10, in the Commercial & Residential Solutions, underlying sales were up 2% in the quarter. In North America, air conditioning demand accelerated versus the second quarter, underlying demand and macroeconomic trends remain strong and we expect air conditioning growth to further accelerate into Q4. Growth in China was impacted by timing of government subsidies for heat pump units. Outside of China, demand remained strong across the rest of Asia in air conditioning and refrigeration markets. Solid growth continues in Europe reflecting steady demand for professional tools and strong growth in air conditioning, heating and refrigeration markets. Margin decreased 80 basis points as material inflation and unfavorable mix was partially offset by operational leverage, higher price realization and the benefit of prior-period restructuring actions and aided by the divestiture of the ClosetMaid business which was sold in October of 2017. And now if you turn, please, to slide 11 and I will hand the call over to Bob Sharp.

Thanks, Tim. First of all, I'll give everybody an update. We closed on Textron Tools & Tests right at the beginning of the quarter. So as Q4 is reported, you'll see it's starting to come into the numbers. And I'll say we're off to a very good start here, a very good combination. We have merged RIDGID Tool and Tools & Test together into a single professional tools organization with a singular management team. That's well underway. A lot of activities now around our global footprint, especially from a sales coverage and customer standpoint at the beginning. A lot of work right now with optimizing our North America sales presence and, again, good progress on that. We'll be having some actions here soon. Focusing heavily right now on the spend, you saw a lot of opportunities we presented as far as margin potential. Materials is a big piece of that. We've already done a heavy analysis of the material buy of the Tools & Test business combined with RIDGID and have a number of activities underway, certainly, applying Emerson's terms around payables and other things with some very good quick progress there. So overall, good organization. We've had several meetings with these management team and employees throughout the sites and we've been in all the factories, doing a lot of work in the factories around safety and operational activities. And I'll say there's a very good vibe right now as far as people feeling the combination, both from the RIDGID folks, as well as the Textron Tools folks recognizing that this is a very obvious cultural combination, if you will. And everybody's seeing some good opportunities and really good reaction from the customers as well. So we've talked about synergies. You see synergies around $40 million, a lot of that…

All right. Thanks Bob. So, turn to slide 13, which steps through our changes to our EPS guidance. The table starts with our May 1st GAAP EPS guidance of $3.10 to $3.20. As shown here, we are raising the guidance range $0.05 for stronger performance and $0.24 for our one-time tax benefit in Q3 associated with clarifications on U.S. tax reform implementation. The $150 million tax benefit in Q3 drove a 6% GAAP tax rate and reduced our full year expected tax rate from 25% to 27% to approximately 19%. Also included in the guidance update is $0.06 in Q4 for purchase accounting and restructuring charges associated with the Tools & Test and Aventics acquisitions. For these acquisitions, we expect to have little, if any, additional purchase accounting charges carry over into fiscal 2019. And finally, as discussed on our call – on our Q1 call, in response to U.S. tax reform legislation, the company reviewed U.S. comp and benefits programs and has enacted numerous improvements. As part of this, in the fourth quarter, we will take a charge of $24 million, or $0.03 per share, for discretionary one-time 401(k) contribution to every member of our U.S. workforce. The net impact of these changes is to raise our GAAP guidance range $0.20 to $3.30 to $3.40. Please turn now to slide 14, which outlines our updated full year guidance, and please note that this framework now includes the sales and earnings impact of the recently closed Tools & Test and Aventics acquisitions. We expect total Emerson underlying sales to grow 7.5% with Automation Solutions up 9% and Commercial & Residential Solutions up 4.5%. The GAAP EPS range of $3.30 to $3.40 represents growth of 30% to 34% compared with the prior year. This guidance assumes a neutral price/cost impact, as we continue to offset material inflation with price realization and cost reduction efforts. The expected effective tax rate for 2018 is reduced to 19% due to the one-time benefit in Q3, and we expect the tax rate in 2019 and thereafter to be 25%. The fourth quarter will be our fifth consecutive quarter of strong sales and earnings per share growth, as Q4 of last year was the first time since our strategic repositioning that we delivered both strong sales growth and earnings per share growth. In this fourth quarter, we expect 7% to 8% underlying growth and earnings per share of $0.86, plus or minus $0.05, including the $0.09 of acquisition charges and one-time 401(k) contribution shown on the bridge. For 2018, we expect free cash flow conversion of 110%, reflecting our high quality earnings. This guidance is in line with our prior guidance of 115% excluding the one-time tax benefit in the third quarter. And now, please turn to slide 15, and I will hand the call over to Mr. David Farr.

Thank you very much, Tim. I also want to thank Bob and Mike for joining us today and updating everybody. They'll obviously be on the call to answer questions for the people that want to ask questions. As you look at the order trend chart, the trends have continued to stay within the band that we outlined in February of 2018 at the conference in New York. In total, I expect this will continue in the fourth quarter. I would expect us to be at the high end of this band as we've moved up towards that greater than 5%. Automation Solutions orders will continue to do well. From the standpoint of both Mike's business and Bob's business, Mike is now starting to come into tougher and tougher comps, because last year at this time, he had a very strong July and it will start to continue to bounce up against that. Bob's business clearly has been positive in the 5% to 10% range, and now it's a little slower over the last couple – two years. And so, his comparisons are getting tougher and tougher. But overall, I feel very good about the momentum, the pace of business is not slowing down, our growth and opportunities are out there, and we're seeing our customers continue to spend. We are seeing the impact – the positive impact of the new tax law in the United States, and people are spending money and we are clearly getting that piece of business. If you look at our North America sales and orders, they've been very strong since the enactment of the tax law. But I want to thank everybody for joining us today. One thing you might have noted from the first page, we had a recent STEM program and I was addressing my new employees, and I had one in the front row here in the little green outfit, you'll go back and look at that photograph, and she was asking me a great question. Her parents are shareholders and she was asking me a very delicate question. She said Mr. Farr, are you going to break the dividend string in 2019, and I said, I see no reason to break the dividend string in 2019, so – and she said, good, I'll be able to afford to buy more milk or whatever I need for eating here. So, she was very diligently asking me questions about the dividends, which is quite interesting.

Good shareholder.

Yeah. She's a very good shareholder. I like those type of shareholders. As you know, one of the things that we've been doing and working across the company since the new platform structure is to make sure we have the right benefit structure, the right compensation structure across the global world. Clearly, we're trying to make sure that we're making the right enhancements to stay competitive. And as we said in the press release, we have continued to make changes to our package and – both on the health and medical side, also parental leave improvements, better vacation plans, and now the most recent one is the improvement in our 401(k), and we're making a one-time contribution to our U.S. employees which is going to cost us around $24 million. But it's all about making sure we have the best group of employees that we need around the world as we continue to enhance our benefits around the world. And in today's competitive environment, this is very, very important and we wanted to make sure that we did it. We'll continue to tune things a little bit, but the major actions have been undertaken and we'll continue to make sure that we stay competitive on a global basis, so that's extremely important to us. If you look at everything that's going on, it's been a very good six months. If I look at the improvement of sales, I look at the improvement of orders, I look at our gross margins, our EBIT margins, our cash flow, both businesses are operating at very high levels of performance. We had two days of planning conference with the new Final Control business. The total integration of V&C was outstanding. They are ahead relative to sales expectations. Our orders this year in both businesses…

Absolutely. We will now begin the question-and-answer session. Today's first question comes from Nicole DeBlase of Deutsche Bank. Please go ahead.

Yeah. Thanks. Good afternoon, everyone.

Good afternoon, Nicole.

So, I guess last quarter, on the second quarter call, you commented that you expected Automation Solutions organic growth could accelerate in 2019, and we now have another quarter under our belt, things are stronger than expected, order growth was really healthy. So, I guess, would you sit here and make that same comment today, Dave?

Yeah. The issue was I've always said from the early on in the beginning of the year, Nicole, what I saw – I looked at this as a two-year type of band of growth. We always felt that the growth was going to accelerate throughout the year. We thought this year would be more of a not double-digit, we didn't think we'd cross that 10% mark. Clearly, now as I look at the two years, I've always felt that we would have somewhere around 16% to 18% to 19% combined growth. We have a lot of momentum right now. And so, we have a stronger front-end load. And so, from my perspective right now, I'm looking probably equal years from the standpoint. I don't see – there are certain things that our customers can work on, and as Mike said, as we see the funnels come up towards this top number, it could go up maybe a little bit higher, but at some point in time, we only can work on so many projects. So, the momentum is pretty strong. We're going to have obviously a stronger year this year. We're getting closer to 10% for the whole year underlying growth rate for the Automation business. And therefore – so, I'm looking next year probably going to be in that 9% to 10% range now, because I'm looking at that – I look at the two-year cycle for this business and it's not any different than I said last year or earlier this year. I said if we have a 7%, 8%, then I expect us to be a 9%, 10% next year. So, now I'm looking more equal-equal, Nicole, for the year just based on the way our customer base. And Mike, do you want to add anything to that?

I'd say we've seen very strong KOB3, the aftermarket business...

Yeah.

...throughout the year. It's been probably stronger than we even anticipated in February, and it's been good for our business. It's a relatively fast turn business. I think that's helped contribute to the second half here in a major way. The KOB1 projects, the greenfield projects will come along. They have their pace as you've indicated. They've got to get engineered. And I think – again, I think there was a lot of pent-up demand on the KOB3 side and we've seen a lot of that come through here as these customers have felt better with their cash flows and where they're sitting. So, I can't tell you that it can't be a double-digit year next year, but I think something in that 7%, 8%, 9% range right now feels about right.

Yeah.

We always have to play it out and see what happens.

Yeah. I mean, historically, we have seen a two-year cycle, if you look back our cycles, we're typically when we're taking off on combined basis is at 16%, 17%, 18%, 19% on a 24-month time period. So, that's how I look at it. I thought we were going to be less front-end loaded. Now, it looks like we're stronger. But it's going to be a good year anyway you look at it, Nicole. Right now, our backlog – our growth in orders are strong. So, we're very positive about it. Now, we got to make sure we've enough people. That's a big issue now.

Got it. Thanks, Dave. And I guess for my follow-up, I know you've talked about in the past that one of your top concerns from a macro perspective is trade war. So, I have to ask, have you quantified the risk to Emerson from the tariffs that have been enacted to date? And I guess, just level of flexibility on your supply chain, your manufacturing footprint to handle what we're seeing today?

We have quantified it. We've not gone publicly. It's not that huge of a number relative to what we're doing. The teams have done a great job of offsetting both with material containment or pricing actions. We're staying slightly green. I think that will be the case for the fourth quarter and again next year. Obviously, Bob's business is more challenging. He has less flexibility in the short-term, but over the long-term, he can adjust. We have the flexibility around the world. We talked about this with the board, where today one of our global strategy is to have that flex manufacturing capability and we've had that flex manufacturing capability. Fortunately our businesses are not in, let's say, the bull's-eye of a lot of the tariff activity. So, it's smaller and we can react to it. So, just as much as – maybe some of our competitors are hurt, we're hurt, and vice versa, it's been a pretty good trade-off. But I don't like the way it's unfolding and hopefully things will settle. But right now, it's manageable as we told the board. And next year, what will happen is we'll have to have more material containment, we'll have to have a little bit more pricing, and clearly, it's creating an inflationary environment which helps us both at the top line, faster growth, but also forces us to do a lot more material containment around it. So, it's very manageable at this point in time even with the current actions underway and I have much bigger issues in the world than that.

Understood. Thanks, Dave.

Thank you.

And our next question today comes from Julian Mitchell with Barclays. Please go ahead.

Hi. Good afternoon. Maybe a first question just on the incremental margins in Automation, I think you've been pretty clear on the top line drivers. Your incremental margins in the third quarter, I think were close to 30% or so. So, just wondered when you're looking at the good progress on Valves & Controls and the changing mix of sort of revenues in AS over the next 12 months, do you think that 30% level is a good incremental margin to aim at?

If you look at the true underlying performance, we are around 35% for the quarter. And as we talked about – this is Julian, correct?

Yes.

Yes.

Julian, as we talked about is what Mike is having to do right now with the faster order pace running at 12% – 10%, 12%, Mike is starting to have to – and we talked about this, he'll have to start adding some incremental people around the world to deal with the projects. So, I feel very comfortable in this 30%, 35% range at this growth level. If growth level slows down, then we'll expect that to go up a little bit higher. But right now, we're having to put people in place, we're having to make investments both from the capacity and from a capital standpoint and to take care of some of this growth. Many of Mike's businesses right now in North America are actually getting back to peak performance in last cycle in its actual sales. So, what that means is we're having to get our plants geared up, we're having to get the people geared up, and that's something that we got to make sure we stay ahead of given our presence around the world and given how fast we're leading out of this relative to our competitors. I feel very good about the margin at this point in time, but Mike and I also have to keep having the debate back and forth what's the right balance of adding new people, adding new capacity, and it's a debate that we have a lot, but I think our margin right now – this quarter is around 35%. I think we're going to stay in this 35% range. And if we have to drift it down a little bit for Mike, then we'll do that, but also if he slows, we're going to take it back up. So, that's how we see it right now. Mike, do you have anything you want to add from Julian's standpoint?

No. I think that's right. Again, we've had a very nice mix of business so far.

Yeah.

(00:36:44) North America...

Correct.

...all have been...

Very good.

...all have been very positive, very good for us.

We don't see – going back to both what Nicole asked and what you're talking about here, our project load right now, if you look at it, it's still very KOB1, KOB2 centric. The big projects have just started coming. And as you know me, Julian, I like to take guesses. So, as I look at the project funnel right now, what Mike is talking about and his business are talking about, it looks to me like it's really 2020, 2021 that the KOB1 mix are really going to put pressure on us, and then – but we have to get ready for that up to that, because it looks like that's where those bigger projects are heading. I mean, if you look at classic example, if you look at what happened to ExxonMobil last quarter, I mean I've always felt that our industry is underspent and was not ready for the downturn. And you saw that from the standpoint that now people are having to spend – quickly have to spend on maintaining their facilities and the production is having to come up much faster. And if they had not maintained their facilities or are not ready for this, they obviously suffer. And this is happening across the world in this case, and it's something we saw because they cut so deeply from a capital standpoint. So, that's where we are.

Thank you. And then, just maybe for my follow-up switching to Bob's business, the North America growth has been pretty soft in the last few quarters, I guess, in Commercial & Resi.

Yeah.

I mean, it looks like the – in Residential HVAC, at least the OEMs have seen high-single-digit growth on average in the last couple of quarters. So, just wondered is there just some timing that's weighing on the Commercial & Resi North America numbers, some market share moving around or just kind of what's going on there and when do you see that North America piece reaccelerating?

Before I turn it over (00:38:39), keep in mind too also, our OEMs have been getting price now for 18 months. They've been going out with some very large price increases. And so, some of those numbers – they had good underlying volume, but some of those numbers also are price inflated. So, Bob, you can answer the question now.

Right. I think you're going to see that pretty heavily. I mean, I think everybody knows that we've got material clauses that we do with our – especially the large U.S. OEMs on pricing. And when the – in the deflationary time, we enjoy that a lot. If you remember back in 2016, we had over 2 points of EBIT margin improvement for Climate, and obviously now that's in a different zone, but again that's kind of normal. That is certainly widening the sales reported numbers as well. I think we've got a pretty strong presence in the industry. We think we know very well what's going on. We don't see participation issues. Frankly, there are some advantages. You've probably seen in the industry a compressor manufacturer very recently announcing that they're going to be moving away from the industry. And frankly, there's a lot of activity right now, we're involved with, with helping out some customers respond to that quickly. So, that's good news for us. Three to one (00:39:53), there are some compressors coming this way. We don't ship compressors from here to China, but there are compressors that come in this way from some of the competition...

From China to here.

...from China to here. That has also created some conversations, let's say, with OEMs. So, again, there's a gap right now, no question. We model it a 100 different ways, and frankly, I can't say we ever found the perfect way to correlate between what we report and what they do. There's distribution, there's timing, there's prebuilds, there's a lot of things that play out. But overall, again, we think we understand our position in this space and it's playing out pretty normally, I guess.

I mean, Julian, it's – we watch it very closely, because we know everyone reports around this space here and we play with all the players. I mean, I would expect Bob's business here to probably be up pretty good for the next five to six months a good order pace as these guys do a lot of moving around and shuffling and replace the backlog of the pipeline. So, overall, we feel very good about it and we'll see how it unfolds, but it's definitely a different mix this year than we've seen in the past. Service levels, service type of – several products have been different this year and how service has been doing, and it's a good year overall. So, I mean...

That's good. And Q4 has been a warm quarter and we feel good about the way this quarter is playing out as well.

Thanks. Great. Thank you.

Thank you.

And our next question today comes from Steve Tusa of JPMorgan. Please go ahead.

Hello, David.

Good afternoon, Steve. How are you doing?

Looks like a...

I had to bring a couple friends to take you on today. So, I've got three guys here. I've got my baseball bat. I've got my Rally Monkey. The Rally Monkey is really keeping a very close eye on Tim, because...

It's really staring me down.

It's staring Tim down right now, and so...

It's making me nervous.

Yeah. He's right behind Tim's head looking at him. What can I do for you, Mr. Tusa?

It must have been nice to have that kind of engaged and thoughtful crowd in that auditorium versus some of the Investor Days. This looks like an engaged crowd there, so.

(00:42:04)

A new audience for you.

Steve she not only had iPhones taking pictures of my charts. You'll notice I had the one chart rolled up, because I was afraid to show her, because she wanted to take it home, it was our dividend history.

Leave it there for a fortnight.

Nice to refresh the audience every once in a while, that's key, got to keep them fresh. How many years has it been now – I mean, jeez?

No funky sweaters on, either. Nobody had those little funky sweater shirts on, either.

Anyway. Anyway. On this Climate thing, what will your volumes grow in kind of North America Resi for the year now, kind of on a seasonal adjusted basis? I mean, I guess your fiscal year is kind of aligned with the OEM's calendar year. I'm just curious what that number will be ultimately? What do you think it will be when all is said and done?

What will the volume numbers be for this year?

Yeah. Like, mid-singles? I mean, it just seems like – I just want to get a number on the board.

Yeah. We'll be in the mid-singles.

Okay.

And to be honest, the compressor shipments this year are hitting an all-time high for us.

Right.

I think we are hitting an all-time high. And so, the plants are running pretty strong right now and a lot of our customers are starting to level load more production, Steve, versus where they used to try to cycle. We're starting to see more and more customers to try to keep things level, which smooths us out more. So, we're not seasonal. It's a different view than we – we're starting to see some different habits from our customers now.

Right.

In the last few years, we've had quarters where it's been down in a quarter, and we've had quarters that have been high-single and double-digit. So, even quarter to quarter, there can be several point swing.

And I guess, I'm just kind of struggling a little bit with the fourth quarter, because you said about six ways from Sunday $0.86 and maybe plus, maybe minus. Normal seasonality to us looks more like $0.90 and I'm just trying to figure out, if Climate is bouncing back and the orders here at Automation quite frankly accelerated, did you pull something forward here into the third quarter? It doesn't seem like that.

No. No, we didn't. You also got to keep in mind that $0.86 we're taking care of the one-time accounting stuff for Aventics, we're taking care of the $0.03. And so, I mean...

Right.

...those are two restructuring. So, you're right I mean normally. But we're also taking care of some issues as we close some deals and as we do the one-time 401(k). So, that I mean – as you well know, Steve, I really can't call a quarter within $0.05. And so, when I look at that and say that feels about right and it would be, as you say, the normal seasonal thing would be around that $0.90 plus. That's why if you – that's what we have to deal with relative to the...

Got it.

...that's what's going on. So, you're not that far off. It's just – don't forget about the $0.06 and the $.03 from what we're doing there.

Right. And then, I guess just as a follow-up to that, on Climate, you guys have these kind of escalators that I guess that would mean your pricing is going to kind of lag by maybe a quarter or two, a quarter plus relative to raw materials. It's not necessarily like, hey, we're an OEM and we're going to do a price increase at the beginning of the year, and then this kind of unusual price increase in the middle of the year. You guys are a bit more on a rolling basis. So, I mean, if raw is kind of stabilized here, can you be in Climate green at some point here in 2019 and start to kind of flip the other way for a period of time, given the way your escalators are working?

Yeah. It depends on the timing of when it happens. Again, if it happens later in the year, it's difficult, because we're still carrying that drag. But, again, you saw it happen when it turned unfavorable on us about 18 or so months ago. Like you said, it takes a quarter or two to sink in. And as it subsides or even stabilizes, that's about the same kind of a lag timing to go the other way.

Right.

We'll start seeing the benefit – you'll see the benefit next coming now in early next year, 2019, so.

Right. So, that's a good guide.

...outside of the lags, we are green already.

Yeah.

Got it. Got it. Got it.

And it's going to play out that way again through next year.

Got it.

Steve we work a very fine line with our OEMs, because we know that we're trying to make sure they stay competitive, we stay competitive, but also we're trying to keep it really tight around that plus or minus line relative to price/cost type of situation.

Right. One last one for you, Valves & Controls, what kind of revenues will that business finish at in fiscal 2018 or?

I don't think the revenue is going to change much. I think they're going to be slightly – on a reported basis, they're going to be slightly down, because of the divestitures in the product lines we got rid of.

Right.

But the underlying growth rate is now growing. So, now next year we're going to have a growth. And so, the underlying order growth is around 9%, 10%. So, they were slightly down because of what we divested and what we're getting out of, but now they're coming off. And if you look at the order pattern, they're growing faster. So, now they're going to start growing. So, overall, we're going to grow that business and it's going to be – we got a good couple years here between that business and what we're trying to do with it.

Yeah. Looks like it. All right. Thanks a lot.

Thank you very much, Steve. I appreciate it.

Take it easy. Yeah.

And our next question today comes from Steve Winoker of UBS. Please go ahead.

Hey. Thanks and good afternoon.

How you doing, Steve?

Hey, Dave. I can't resist also on that front page, I know you guys turn over every stone for new investors and applause, and on that one, it looks like you got both.

It's definitely. And as Tusa said, this is a little bit more friendly audience, other than the fact that they never shut up. I mean...

Well, that's not that different. Anyway.

...but that was an unbelievable time we had. I don't know how many kids we had, 400 kids in that room? I mean, Tim was around here. Tim the Toolman was around here somewhere, too. His kids were there.

Yeah. You should let the analysts bring their kids next time, too. Probably it'd be a better day.

Yeah. In New York – yeah, we're doing it in New York. You can bring your kids in. Now, have your kids heard anyone swear before?

All the time, because I let them play – I play your replays for them, so.

(00:48:33)

Anyway. So, listen, on page 8 for you and Mike, that large project funnel, I just want to go back to that, and the resilience of that sliver, there were large, large projects in the 2018 timeframe through 2019. How resilient are those in terms of the decision dates? All of this macro turmoil, you've already addressed it a little bit. Once these things get started, they're very hard to stop. And how deep into that do you think we are for the kind of KOB1 and KOB2?

(00:49:10)

So, I'd say for the, we'll call it the megas, the big ones that we showed you a little depiction of that when we were together in February. If I drew that chart again, it would look similar, some megas and a lot of smaller projects, and kind of the positions timing-wise similar. The big space there is the L&G space. There are 10-plus projects there that are on the mega sizes. They are gearing up. Again, I've been around the world to meet the EPCs that specifically touch those projects. They are doing a lot of work right now getting ready. We're doing a lot of budgetary quotations to them, so they can plan their projects.

You're talking about trying to tie up some capacity?

I told them they better start reserving capacity. You can just see this bow wave coming at us and they need to start thinking that way.

Yeah.

They want all of our valves, they want all of the engineers to work on these projects, they need to get in line with us pretty early and they're doing that. They are doing that.

And how does that relate to that $700 million to $800 million number that you gave in terms of awards versus your wins? And should we think about therefore that piece of it stepping up significantly?

Yeah. The largest ones, they're still out there.

Yeah. The big...

A lot of the awards are been on the smaller size.

Yeah. He's been – most of the awards have been in the $1 million to $10 million range. You've got a couple bigger ones, but most of them are smaller.

Yeah. They're not in the $100 million plus, but we've had – and when we get an award, it could be for a piece of the business, we might get systems early, we might get the valves early. So, we're tracking all of the puts and takes around that. So, take $800 million out of the funnel, we saw about $2 billion go into the funnel to kind of make all the math work out. So, that's what I kind of think. I don't think we'll see the funnel getting larger, because I think anything that works at $78 a gallon oil is identified, it's out there and if it's going to have a decision date within 2.5 years, it's got to worked right.

Steve, what goes on at the CEO level on these projects, and I'll give you my perspective of what goes on here is the projects, they have them prioritized right now, but the prioritization will change. And what will happen is the CEOs, the executives will look and say, okay, the people, the location in the world, there might be issues popping up in regions of the world or they need more gas, they need more oil or we need more issues relative to our own manufacturing, they will move some of these projects, you can see a project move six months in, six months out. These projects will slip moving in and out, but what we see is we track them and we move them back, when you can see other ones come in front. So, right now what we have been seeing is the projects have been moving around a little bit. So, we're – it's like a motion. This doesn't look like a motion, but those things are moving. But the funnel is pretty tight and consistent, and where some of these projects are moving around is pretty good right now. But what we didn't have in February and we don't have it here now is that we had only a few of what we call the big megas sitting in 2019, early-2020. We now look at that chart and there's a lot more of the megas coming in late-2019, early-2020. So, that tells me when I made my earlier statement, I think our KOB1 business is really going to start getting up there in that level in the late-2020, 2021 type of period, because that's what's going to happen. That's where we're right now. The funnel is shaping up pretty nicely. We might get up to $7 billion total, but that's a lot of work going on out there at this point in time.

And Dave, I don't think you put a finer point, but if you could on the July order experience in AS and maybe in C&RS, too?

Mike was real close around 10% and ARS (00:52:40) was probably very consistent with where we were before I think, in the 3% to 4% range. That's very preliminary numbers and we push him hard to get a number for this call here. But I still think we're in the good side of that band. And so, overall, we're in pretty good shape.

Okay. And just lastly, Mike – sorry, Bob, we talked a lot about cold chain in Asia, commercial opportunity when we last saw each other. This China heat pump subsidy push-out slightly doesn't change any of the math you've got on kind of a one-year view, two-year view?

No, not at all. Like I said, cold chain this year, we're going to be in the high-teens, let's say, territory. We've done a lot of things to put that organization together for a full solutions play. The Cargo and Cooper-Atkins acquisitions, we are putting infrastructure in Asia and Europe to internationalize. So those are progressing well.

Steve, before you go, I'm going to ask Bob or Mike to comment. I mean, no one has really talked much – asked quite but Mike had a phenomenal quarter in China. And it's very broad-based, because we were just over there and we did a review. And we were up on sales 20-some-odd percent for the quarter? The quarter has been very strong. So we're seeing – Mike, do you comment, we're seeing very broad across all industries a lot of new players coming in and starting to build stuff both in China and moving outside. And that's been a very pleasant surprise for the last couple of quarters. You may want to comment?

China has been strong for us. I think locally we've seen a lot of, the state owned is busy, a lot going on with the privately-owned enterprises. We're seeing these chemical companies rise up over the last five, six, seven years. They're getting very serious. They don't want to buy the mid-tier product anymore. They want the high-quality stuff and they're leaving the borders. We've got one that we're working on that's going to go to Louisiana staying at the gas prices. But China for us is broad-based. And, again, I think I referenced it in February, there's a refining wave that's going to come at us in China, a smaller one in India to go along with it.

It's a power wave.

A lot of spend there. Power is still very solid for us. We saw the nuclear plants start-up here in the last few months. So we got some of those behind us now. So we can get on to the next ones that we've been ready to work on.

But I would...

I'd say.

I was impressed.

...China is really a delight.

I was impressed, Steve. I was there with Mike and his team just recently. Bob was there, too. Bob tried to do, tried to run me over in a car, you were with me too, so.

I didn't try because I was next to you.

Yeah, but I was impressed with the broad base of all the orders and the type of industries going on and the customer list. And one of the good things in this cycle here is a lot of the smaller players that we are competing against do not have financing. They don't have the money to get – access to money. And so the big multinational companies continue to make investments, which we continue to do, including upgrading our manufacturing capability in China with the V&C stuff. We are really, really actually separating ourself again in China.

Okay. Thanks. Good guys.

Thanks.

And outside of China, we're talking a lot about China. Commercial, we were double-digit outside of China in Q3 and we were in Q2 also. So there's plenty of activity going on in Asia broadly.

Yeah.

Great.

Yeah, we had same.

Good job. Who is next?

Thanks.

And our next question today comes from Jeff Sprague of Vertical Research. Please go ahead.

Thank you. Good day, everyone.

Hey, Jeff. You notice how our orders and sales stayed pretty consistent and how they sort of track together?

Yeah, that's amazing. I cover a bunch of companies that that doesn't happen.

Really. One of the differences we have, Sprague and a lot of people give me a hard time about releasing orders, all of these guys are going shit I can't believe you'd say that, but that's okay. The issue is one of the disciplines we have across this company is making sure the order pace and monitoring those and what we tell you guys are consistent, because if you don't get an order and eventually get sales, something is going on.

Yeah.

So I just had to tweak you a little bit my friend.

Well, I always give you credit for those orders but thanks for calling it out. I guess, even the kids in the audience probably now that if sales don't catch up with orders, then the orders aren't real, right?

I'll explain that. That was the next question I've got. She asked about the dividend. She didn't quite get the connection between. I mean, I tell the guys, orders are great but without a sale I can't pay a dividend. These guys hear me say that all the time. Go ahead.

I thought you are trying to suggest we were children by the way you put that on the slide, but...

That's not a bad thought.

Yeah. So, hey, obviously, things look extremely robust and everything you said about projects sounds very encouraging. How do you put in context the fact, though, that you're looking at CapEx in your sort of markets actually now exceeding the 2014 peaks when oil prices are lower and there's other maybe countervailing forces? Would that reflect that maybe some of those projects just got truncated in 2014 and didn't happen? Or just what kind of big picture perspective would you add to that?

Wow.

Well, I think as we came off the 2014 and the peak, there were projects that were planned and did not move and they got parked and they kind of idled and they've gotten resurrected. And a little bit of pre speed (00:58:10) work has been done on them and now people are making those decisions to move forward. So we're certainly seeing some like that that have been hanging out there for a couple of years, Jeff.

I'd say, Jeff, the biggest issue we see in North America is North America has very strong and there's capital. If you look at the GFI in the U.S., you'll see the numbers are quite strong. Is that – the pressure on our customer base was so enormous relative to cut capital so quickly that they stopped stuff very quickly in North America. They did not stop as quickly internationally in North America and that's why we've seen the North America bounce back. And so I'm sitting there in the Valves & Controls conference with Final Control and we're seeing North America numbers coming back to levels we saw in 2014 so quickly. And that tells me that things were cut off abruptly and they had to come right back on and they're ready to do it right and I think that's a very good observation because that's what we're seeing right now.

One other insight there is the movement of energy to different parts of the world has gone up. The U.S. is exporting LNG, it was not doing that back in 2014. So we're seeing terminal and midstream spend build...

They're all good thing for us.

We're seeing it in Mexico, we're sitting it in the Middle East, we're seeing it in Asia.

All right.

So I think those are some of the things that are different.

All right.

Resources becomes a throttle too on those projects, right? I mean, yeah, that's happened before in the peak time.

Exactly. The other thing I would say that with the way I talked about V&C, I think V&C, the Valves & Controls, they did not have the capability of manufacturing the products here in the United States. And one of the things Mike's team has gone on rapidly is now, we have huge opportunities here in North America that we get addressed very quickly with our channels. And the markets turned our way. So we're now getting V&C products into customers that they never been in before. And now we're having to quickly accelerate manufacturing and spend money and that's given us another little bump here in North America that we were not anticipating. My hat is off to Ram and his team and Mike for getting that done because that was not easy to do. We still have 18, 24 months of fairly good investments to make here. But things moved our way pretty quickly and the team executed very rapidly and the timing of the V&C acquisition has been on perfect, as I look at it.

I'd say all across the platform, everybody stepped up.

We need them.

And everybody is going fast.

We needed them.

Very clear. Just one thing. There's obviously been a disconnect in Automation this year kind of observed incremental versus underlying as you digested V&C. Should those numbers be very similar now in 2019? You've got a little Aventics noise, but should be kind of what we see is what we get on the incrementals?

V&C is on a good path to improve. They will continue to improve. They're not there yet. Aventics, sizable number going to come in lower. It's going to average us down. We will work that over time. Take a couple years.

I think that the big issue is what we're having to go through right now is we're having to spend some different capacity and some investment both in some of the service centers around the world. I mean, I think we'll probably still have a one more year of a slight dilution there from an impact. But the profitability is going to be still very good, but I don't think it will be quite accelerating as you're thinking there, Jeff. Because I still see some dilution impact, and I still see some incremental investment that we're making faster than we originally planned.

Great.

We have a lot of potential.

Yeah.

Solid. Thank you.

Thank you.

And our next question today comes from Nigel Coe of Wolfe Research. Please go ahead.

Thanks. Good afternoon, Dave.

Go ahead.

Yeah. So just want to go back to the product funnel, the obviously very impressive buildup of projects. I just want to broaden out Jeff's question. What do you think this implies for the broader cycle? I mean, I'm talking here about some of your shorter cycle businesses. And the – sort of the question is that the view out there is that we are late cycle, but my read of this is that we're now probably in mid cycle, any views there Dave?

Yeah, I'll give you my two cents. First of all, this is my gut feeling as you well pointed, Nigel, I mean, I've been in business long time, almost since my 18th year. I've been around this stuff for a long time. So this is my best feel at this, okay? It's a different cycle. I think we're in early stage of the cycle. I don't think this – there's been such a significant underinvestment, there's a stronger growth globally, there's a shift in energy usage to the gas and alternative fuels, but oil still used quite strongly around the world as a commodity. So what we see right now is a fairly large investment up right now early on to fine tune the facilities and to deal with the short-term capacity and then a long-term. So I think we're earlier cycle on this process. And so that's why, I mean, I feel very good about this point in time and from the standpoint of where we see the projects going, it's going to be – as Bob said, it's going to be a people capacity issue for not only our customers but also all of us too at the same time. But right now I think we've got it under control. It's going to take a little bit more investment and use of technology, but I feel pretty good about where we are in that cycle.

I'd just add, four quarters ago we were still negative. I mean, we just looked at it a year ago and so this year obviously to comp against that we've been able to put up these nice growth rates. But I think the momentum is there. We're going to grow next year along the lines we've talked about earlier, and again I think some of these projects are three, four, five-year length playouts with the sales and everything coming with them. And unless something really wild happens in the world, this stuff is going to happen. They have not been exploring.

No, they haven't been.

They've not been developing.

They're still reducing reserves.

Some of these guys have actually gotten behind. They got to move. So I think it's going to be pretty robust here. So I would still call it early cycle.

Historically, Nigel, I mean, I've been talking about it two years, but if you go and look at three years, I mean, these bundles are three years and they're beginning to the peak and the next year down. You're typically talking on average around 26% to 28%, 29% three-year type of average numbers of growth. And so we're just starting into this cycle at this point in time. On an average, you could take the three years and average it out.

Right. So I want to come back to the two-year comments. You mentioned a two-year cycle. So what you're saying now is thee years. So if it's two years of 8%, 9% growth then third year would be in that sort of slightly lower rate, but still 6%, 7%?

Yeah, 6% to 8% type of stuff. It's historically what we've seen.

Yeah. Okay. Great. And then the follow-up question, so with the dilution on Aventics and Textron hitting in 4Q, it sounds like you got nice tailwinds to M&A in 2019. Can you just maybe fill in some gaps on 2019? You gave us the tax rate, but how about corporate? I think this year was a double year on the benefit. So how does corporate look into next year and any other color on 2019 would be helpful as well.

So the – I mean for corporate cost expense standpoint?

Yeah.

Well, I mean, I think we're in pretty good shape for the year because a couple things happened. We no longer have an overlap relative to our long-term performance share plan because we've now got that totally engaged, so we don't have that delta. The pension right now is still looking good. I think our pension costs are coming down. From an acquisition standpoint, I mean, my plan – we have done on average what, a $1.5 billion to $2 billion over the last two years. I think we're going to be less than $1 billion next year at this point in time. So from a corporate standpoint, we're in pretty good shape. We should be positive. We're in pretty good shape there. I don't see anything extraordinary coming at us at this point in time. We're still trying to manage the capital. You guys think it's real easy to spend money, sometimes it takes time to spend money and we're managing at that, and trying to get production geared up from that standpoint. But overall, I think the cost containment is pretty good. We're just selectively making – having to make some investments to deal with a long-term project that Mike sees coming at them and we want to make sure we're ready. We don't want to lose them and we want to make sure we can serve our customers on a global basis.

Well, that's a good example of capital, right, because commercial construction ability to execute is limited by the industry.

Right.

Yeah. That's an issue.

Yeah, the corporate overlap, is that about $50 million of benefit next year?

I don't know, I haven't looked at it that tightly we'll talk to you in a week or so.

You figure it out and tell us.

Nigel, we're not – we haven't looked at 2019 that tightly yet...

Okay. Got it.

Was it Andrew?

Nigel, Nigel.

Nigel, we haven't looked at that closely yet. Gee, we're trying to get the fourth quarter done.

Right. Okay. Thanks.

It will be a positive. I don't know, it will be a positive. I couldn't tell it that...

...we can't size it like that.

God, I wish I was that good.

Okay.

Thank you. You guys think we're that accurate.

And our next question today comes from Andrew Obin from Bank of America Merrill Lynch. Please go ahead.

Hello, Andrew.

Hey. How are you guys?

Not too bad. We're still trying to calculate the corporate cost. I mean, Frank barely got the tax planning done in the third quarter now he can't give me a total year corporate cost for next year. What's wrong with you, Frank?

Gosh, you know...

I mean, what do you think Andrew? What should we do with his budget, I mean his bonus this year?

I think you should raise it. I assume...

I always liked you.

Exactly. I need as many allies as I can get.

That's great color (01:07:38), Andrew.

Just a question on taxes. It's interesting that it took you guys until this quarter – until this quarter to figure out that you guys want to give the 401(k) contribution. There's still tax adjustments. When you talk to your customers, how far along do you think they are in figuring out their taxes and what kind of impact the new tax structure will have on their behavior? Because I would imagine you guys are more sophisticated than – among the more sophisticated guys. So it took you like nine months to figure this out. What do you think your customer base is in terms of figuring out, okay, what do I do with these taxes?

There's a couple of things going on here. One, the Treasury when they passed the law back in December, hadn't really propagated the laws yet. I mean, so it took a long time for them to get all the rules and regulations out. So as you know this year everyone had provisionals. We took provisionals. And we took a provisional in our first quarter, correct, Frank?

Yes.

And so everyone has done that. Now – because we're a 9/30 company, the laws have been propagated and we have a clear vision of what's going on. So I would expect most companies are calendar year companies. So I would expect them to really get in this sort of figured out in November of – November, December, this timeframe. We just happen to get the rules came out a couple weeks ago, a month – about 30 days ago, about 45 days ago, we were able to get this thing hammered down pretty quickly. And so we moved forward with all the ins and outs of this thing and got it cleaned. Most companies will take all the way to the end of the calendar year to clean this up because there's a lot of things going on around the rules and regulations on the tax laws and that's why I wanted to thank Frank and Alex and those guys because there's a lot of work here and you got to make sure once you make that call that you don't reverse it. And I don't want to reverse it, because we're paying taxes along those lines. So anything else you want to add there, Frank?

No. No, I mean, I think our large customers obviously had a good sense of it, but many of them are calendar year, so they'll probably as Dave said wait till the end of the year. Smaller customers it's hard for me to generalize. I mean I think they figured out the CapEx portion of it pretty quick...

Yeah.

...in terms of getting the accelerated deduction. So I think it's pretty well done. Some of this clarification just came out in the last week. So I mean this is still moving around on us.

And relative to 401(k), we have been planning things and studying things and we looked at all the benefits and this is the last big thing we wanted to do and typically we look at things like this would be more in the fourth quarter for us when we do things for our employees, our fiscal fourth quarter. And so that's why we did it then. I mean could we have done it earlier? The answer is yes. But this was after we looked at everything we were trying to do and magnifying and look at everything and so we made the decision to do it. And so normally when we go out and communicate increases and everything, this is just one more way you could just thank the employees for what they have done for us.

All right. Sure. And in terms of follow-up on the funnel, my understanding is that a big debate in the industry is that large international oil companies are sort of committed publicly to returning money to shareholders and at least publicly they have not committed to CapEx in 2019 or 2020. So some of the funnel that you are seeing are you actually having discussions with people other than – it seems like Exxon is the only one who got shellacked over it. But are you having discussions with people who have not publicly committed to spending money that in fact they are thinking about it?

Absolutely.

Absolutely.

I would say every customer is in that funnel with something, they've all got their priorities, they all got their programs. They don't like taxes going up a lot next year, I don't know but it's built in, they're working on it.

Yeah. I think we talked about this early on, Andrew. The first phase of capital this year were short-term stuff for these guys.

A lot of that....

Quick payback, quick payback, quick payback. They may not be publicly talking to you guys but they know they've got to increase their reserves. They've got to increase the sales, of the top line. So the investment discussions are underway, and it's happening. And it's also from a competitive standpoint they're not going to tell people where they're going for their money because that's a competitive advantage. So I think that you may not be seeing it, but we see it because we have to work with not only the ExxonMobils or the BPs or the Shells of the world, but we're also working with the EPCs right now. So the EPCs are getting very busy. And so, all these different things are coming together. So going back to what Nigel said, I think this is fairly early on in the medium size to large size projects at this point in time. I like where we are at this point and I'm more worried about how I'm going to produce it now as I get into late 2019 or early 2020.

And those LNG projects, these guys are partnering with each other, and then they are going to partner of EPCs...

Yeah.

So there's some complexities around all of that. But once they kind of get lined up, I think as you said Dave, they've kind of got to go.

Total project in LNG right now as you see out there, what's the total magnitude of projects being discussed, the total number?

Over $1 billion out there for us.

Yeah, but on total projects, what's the total projects?

Oh, my God. I mean, 5% to 10% of the...

So $1 billion for us.

We're at 5%. So it will be...

There's a lot going on out there, Andrew.

Absolutely.

We're talking. Okay. Next?

Okay. Thanks a lot, fantastic.

All the best to you my friend. Frank likes you.

And our next question today comes from Gautam Khanna, of Cowen & Company. Please go ahead.

It's got to be our last questioner, Gautam. You're coming up, you're the caboose man.

All right. Pressure is on.

No pressure. Just want to make sure that the caboose is bringing it forward, make sure, no one runs into us.

I hear you. I had – a lot of questions have been asked and answered. But on incremental margins, just to get it calibrated, the two acquisitions Aventics and Tools & Test bring with it how much of intangibles amortization next year and on an ongoing basis, recognizing Q4 has done a lot of the one times?

Give us one second. We'll give you the numbers here, my friend.

The full year amortization for Tools & Test, we gave as $25 million, and then Aventics should be in the same ballpark.

I think about $50 million on a run rate basis for the two of them.

Got it. And so net of that, we're still talking north of $30 million incrementals?

That's where we want to drive.

I like south.

He likes south, but I'm like north. I'm talking for my shareholders.

We have discussions once in a while.

Yes Gautam.

Okay. Just want to be clear. And then getting back to your earlier comment, Dave, about next year not being as rich in M&A opportunity set, is that a function there's opportunities out there or is there some internal constraint given the amount of activity you're doing just to integrate what you got let alone grow?

It's not internal constraint. It's a function of what we're trying to get our hands on right now Gautam. And if you look at the acquisitions of V&C, if you look at the Textron acquisition, you look at the Aventics acquisitions, all three of those major acquisitions in the paradigm, we have been working on for years. So it's just a function of what we see we're working on right now and trying to enticing and encouraging. We may have something new come out of the blue, we don't know about at this point in time, but I'm just looking at what we see working on and what we think we can shake loose as the cooperation where the acquisitions are coming from and it goes through cycles like that, and so we're working very, very hard and as we get into the 2019 and early 2020, they will try shake loose a couple of more good one, nice little bolt-on acquisitions. It just takes time that's how I see it.

Thank you very much, gentlemen.

Okay. Thank you very much. I want to thank everybody for joining us today. And very much appreciate you joining the call, and again, Mike and Bob and Frank, your whole teams out there around the world, thank you very much for what you accomplished this quarter. And we got one more quarter to get done this year and then we can go home and have a drink. Thank you very much, everybody.

And thank you, sir. Today's conference has now concluded, and we thank you all for attending today's presentation. You may now disconnect your lines, and have a wonderful day.